Dropping Down Under: Australia ETF Gives Up Much of Its YTD Gains

The Australian exchange-traded fund (EWA) has unfortunately given back a good share of its year-to-date gains. It is off 8% from its July high.

The Reserve Bank of Australia’s decision to lift its benchmark interest rate to an 11-year high of 6.5 per cent will not help matters much but should shore up the Aussie dollar. The increase comes at a sensitive time for John Howard, prime minister, whose ruling center-right coalition trails the opposition Labor party. Is it good politics to raise rates in the middle of an election fight?

Maybe not. A newspaper poll this week published in the Financial Times found support for Labor had risen to 56 per cent against the ruling Liberal/National coalition’s 44 per cent. Australians and the Australian economy are inordinately sensitive to interest rates. Home ownership, at close to 70 per cent, is high by world standards and variable home loans are common. Australians also have high levels of personal debt. There have been five interest rate hikes since the last election in 2004 and the opposition will surely use this as a tool to call for change.

Another issue is that corporate profits have lagged stock performance and some question how long multiple expansion can move the market. One silver lining is that Australia's compulsory pension prgram accounts for almost 2/3 of the markets $1.6 trillion market value. On the other hand, financial and energy/resource stocks account for a remarkable 60% of the market - a number similar to that in Canada.

The Australian ETF (EWA) is led by BHP Billiton (BHP) which believe it or not has a market value larger than that of Coca-Cola (KO). BHP underscores Australia's strength as a resource rich country. Australia is:

- a leading supplier of core steelmaking raw materials
- the world’s second largest copper producer
- the world’s second largest exporter of energy coal
- the world’s third largest producer of nickel metal
- the world’s fourth largest producer of uranium
- the world’s sixth largest producer of primary aluminum,
- and a significant producer of oil and gas

EWA 1-yr chart:

Comments

[nick.partridge:]

"Is it good politics to raise rates in the middle of an election fight?"

Three little words: <b>Independent Central Bank.</b>

2007 Aug 13 05:31 PM